Corporate Law Update

This week we examine whether a seller who assumed conduct of a claim from a buyer was able later to claim litigation privilege against that buyer (it could not), whether a claim against directors for breach of trust was time-barred (it was not), and a statement by the Pre-emption Group reaffirming its limit on non-pre-emptive share issues.

Seller could not claim privilege when conducting buyer’s claim

The High Court has held that, where a seller under a share sale agreement assumed conduct of proceedings against a third party from the buyer, it could not withhold documents it had prepared for those proceedings from the buyer on the basis they attracted litigation privilege.

The sale completed in July 2014. Subsequently, the Peruvian tax authorities instigated investigations into VAT relating to the project. This culminated in the Peruvian authorities issuing a tax assessment leading to an increase in Minera’s tax liability.

Minera decided to challenge the tax assessment in the Peruvian courts. The sale agreement between Glencore and Minera allowed Glencore to assume control of part of those proceedings.

This is not surprising. It is relatively common for a share sale agreement to allow a seller to conduct proceedings against a third party on behalf of a buyer if those proceedings could result in a warranty claim by the buyer against the seller under the share sale agreement. The seller has a vested interest in defending the third party claim rigorously, as ultimately it is likely to be the seller who will need to absorb any loss or damages if the claim is unsuccessful.

Glencore duly assumed control of the tax proceedings in Minera’s name.

Later, Minera brought separate proceedings against Glencorein Englandto recover amounts relating to the tax liabilities. During theseEnglishproceedings, Minera’s lawyers discovered the existence of 25 documents relating to the Peruvian proceedings that Glencore had not disclosed to Minera.

Glencore said that it did not need to disclose the 25 documents to Minera, because they had been prepared in contemplation of the Peruvian proceedings and so attracted “litigation privilege”. Litigation privilege allows a party to litigation to refrain from disclosing documents if the dominant purpose of the documents is to obtain advice, evidence or information in relation to litigation that is reasonably in contemplation.

In response, Minera said that the litigation privilege in the 25 documents belonged to the party to the Peruvian proceedings, and, although Glencore had beenconductingthe Peruvian proceedings, theclaimantin those proceedings was in fact Minera. Glencore could not, therefore, assert privilege against Minera, because that privilege belonged to Minera itself.

What did the court say?

The court agreed with Minera. In short, it agreed that any litigation privilege in the 25 documents relating to the Peruvian proceedings belonged toMinera, as the party to the Peruvian proceedings. It therefore ordered Glencore to allow Minera to inspect those documents.

The court also decided on other aspects of litigation privilege and disclosure in English civil proceedings, on which we have not touched in this update.

Practical implications

As we note above, a seller will often want to “step into a buyer’s shoes” and pursue a claim against a third party, or defend a claim by a third party, on behalf of a buyer.

It is important to remember that, if proceedings against the third party are unsuccessful, they are likely to be followed swiftly by a claim by the buyer under warranties or indemnities in the share sale agreement.

Before assuming conduct of a third party claim from a buyer, therefore, sellers should ask themselves:

If proposing to make a written communication or record any advice in writing, is this something I am happy for the buyer to see? Do I really need this for the purpose of pursuing the proceedings? A safe approach would be to assume that, whatever the seller produces for the purposes of any litigation it conducts on behalf of the buyer, the buyer will be entitled to see.

If the answer to these questions is “yes”, how much detail does that communication or advice reasonably need to contain? Is there any information that is so commercially sensitive it would be better not to include it, even if this might hinder the chance of success in the third party proceedings?

What is the chance of success in the proceedings against the third party? If the odds are stacked against the buyer, would it be better to leave the buyer to fight it out and simply budget for a warranty claim?

This case concerned litigation privilege, but sellers should also consider legal advice privilege (“LAP”). LAP applies to confidential communications passing between a client and their lawyer for the purposes of obtaining legal advice. Unlike with litigation privilege, when a party tries to assert LAP, it is irrelevant whether or not they are involved in litigation.

However, when assuming conduct of a third party claim, a seller should still take steps to preserve LAP in advice from its lawyers. In particular, it should not share its legal advice with the actual party to the litigation, as this could compromise the confidential nature of the advice and, therefore, any privilege.

No time limit for proceedings against directors

The Supreme Court has held that no limitation period applied to a claim against the directors of a company who declared an unlawful distribution from which they benefitted indirectly.

What happened?

InBurnden Holdings (UK) Limited v Fielding and another, Mr and Mrs Fielding managed a group of companies that operated a conservatory business through two subsidiaries and, through a separate subsidiary called Vital Energi Utilities Limited (“Vital”), a combined heat and power (CHP) business.

In 2007, Scottish & Southern Energy plc (“SSE”) offered to acquire 30% of the group’s CHP business, provided that it was separated out from the group’s conservatory business first.

To this end, the group carried out a demerger to separate the two businesses. Broadly, the demerger was implemented using a section 110 liquidation scheme as follows:

A new holding company was inserted above BHUK.

BHUK transferred the shares in Vital to the new holding company by declaring a dividend in kind (a “distribution in specie”).

The holding company was placed into members’ voluntary liquidation. Under section 110, Insolvency Act 1986, the holding company’s shares in Vital were transferred to a second new holding company (“Vital Holdings”) in which Mr and Mrs Fielding held the majority stake.

Finally, Mrs Fielding sold a 30% stake in Vital Holdings to SSE for £6 million. Of the sale proceeds, she lent £3 million to BHUK and put the remaining £3 million towards the purchase of a house for her and Mr Fielding.

What was the issue?

More than six years later, BHUK brought a claim against Mr and Mrs Fielding, arguing that the dividend had been unlawful and the directors had breached their duties to BHUK.

Mr and Mrs Fielding argued that the time for bringing a claim had passed. Section 21(3) of the Limitation Act 1980 (the “1980 Act”) prevents a claim by a beneficiary against a trustee after six years have passed. (It has been established for some time now that directors of a company are trustees for these purposes, even though they are not trustees in the “traditional” sense.)

However, section 21(1)(b) of the 1980 Act says that no limitation period applies if (among other things) a trustee receives trust property or the proceeds of trust property and “converts” them to his own use.

BHUK argued that, in authorising the dividend, Mr and Mrs Fielding had received trust property – namely the shares in Vital – and, by putting part of the final sale proceeds towards their own house, had converted them to their own use.

Finally, Mr and Mrs Fielding argued in response that (among other things) they had never “received” any trust property, because at no point had they held or owned the shares in Vital. Those shares had remained at all times the property ofone or other of the companies in the group. For this reason, they said, section 21(1)(b) could not apply and the claim must be time-barred.

(It is important to note that the parties were in dispute over whether the dividend was lawful or not. The Supreme Court was not being asked to consider this. Instead, it decided the question of the limitation period on the assumption (but only an assumption) that the dividend was unlawful.)

What did the court say?

In short, the court agreed with BHUK.

It praised the strength of argument put forward by Mr and Mrs Fielding’s counsel. However, it said that it was necessary to look to the purpose of section 21(1)(b).

The court said the purpose of that section was to relieve trustees of liability after six years where they had done something legally or technically wrong, but not dishonest. But it did not protect trustees who “come off with something they ought not to have”, i.e. to appropriate property for themselves.

It did not matter that the property that Mr and Mrs Fielding ultimately appropriated was cash proceeds from the sale of shares in a holding company, rather than the shares in Vital.

They had already “received” the shares in Vital by virtue of being directors of BHUK before the dividend was made. And they converted it to their own use because they were majority shareholders of the new holding company and stood to derive some economic benefit from the sale of the shares.

There was therefore no time limit on bringing proceedings against Mr and Mrs Fielding.

Practical implications

This is a relatively complex and fact-specific case. However, company directors should take note of the following key points which the judgment highlights:

Directors owe fiduciary and statutory duties to their company. This places them in a position of special responsibility and, for certain purposes, makes them trustees. Directors should always consider their fundamental duties before undertaking any transaction on behalf of a company.

Where a director derives some kind of economic or proprietary benefit from a breach of trust, it may be that no limitation period will apply. A director should not always assume that the passing of time will cause a claim to go away.

It is, of course, always important to ensure that a company has distributable reserves before declaring and paying a dividend.

Pre-emption Group reaffirms 10% limit (again)

On 20 July 2017, the Financial Conduct Authority amended certain exemptions from publishing a prospectus in order to implement the early provisions of the EU Prospectus Regulation.

As a result, issuers with securities admitted to trading on a regulated market do not need to publish a prospectus if they are admitting new securities that represent (over a period of 12 months) less than 20% of a class of securities already admitted. Among other things, this increased the previous threshold of 10% to 20%, giving issuers more freedom to admit without a prospectus.

On 27 July 2017, PEG confirmed that this change does not affect the limits for general disapplications of pre-emption rights set out in the Principles. It expected issuers to continue to limit general disapplications to 5% for general corporate purposes and a further 5% only in connection with an acquisition or specified capital investment.

PEG’s new announcement reiterates that the 10% limit is a generally agreed position supported by the Investment Association and the Pensions and Lifetime Savings Association. It says that, whilst decisions about specific placings are a matter for individual shareholders, companies should be mindful of the expectations included in the Principles and use them when engaging on pre-emption issues.